What To Do When Interest Rates Go Down

Will interest rates go down? Yes they will.

The challenge is when will they start and what can we do to prepare?

According to an article in Fortune, analyst at Citi Research believe the Fed “could slash rates by 200 points over 8 straight meetings.” That would be eight cuts of 25 basis points starting this September and lasting until July of next year.

Is it possible? Of course. Anything is possible and it really depends on the economy.

And we must always take these public reports with a grain of salt. If they’re wrong and the Fed doesn’t cut rates or cuts at a slower rate, then they can say “Oh the economy wasn’t nearly as bad.” If they are right and they do slash rates as quickly, they look at geniuses.

In the prediction game, you always want to be a little outlandish just in case you’re right. Otherwise, you’d just be an accountant. (no shade thrown there, I just mean you wouldn’t predict and would merely keep an accurate record what happens)

When Will They Go Down?

Interest rate will go down – it’s simply a matter of when.

What do traders think? The ones who make bets based on what they perceive will be the target rate in future meetings?

As of early July, the probability of a rate cut is in the low single digits:

From the CME FedWatch Tool, screenshot taken 7/8/2024

But if you look at the September 2024 meeting, there is the expectation of nearly 75% chance of a rate cut to 5.00-5.25% (25 basis cut) and a low single digit chance of a 50 basis cut to 4.75-5.00%.

From the CME FedWatch Tool, screenshot taken 7/8/2024

The CME FedWatch tool is just a reflection of what the markets think.

Jerome Powell, the Federal Reserve Chairman, has said in numerous remarks after recent FOMC meetings that cuts will begin this year but likely towards the end of the year. if you’re looking for rate cuts, September seems to be the most likely meeting for a cut of 25-50 basis points.

How Should You Prepare for Rate Cuts?

Banks are already preparing. After numerous meetings of no activity, we’ve seen banks keep rates flat or they’ve begun to lower them ever so slightly. Where you once saw 5.25%, you now see 5.00%.

5.00% has dropped to 4.90%. Banks trimming the rates are a signal of where they expect them to be.

Unlike mortgages, which a bank can sell, they can’t sell a certificate of deposit. Whatever rate you lock in is locked in with that bank.

There will always been a jostling of rates, as banks try to get higher up lists, but for the most part they’re waiting for the Fed to act.

As a consumer, I’d prepare as if September is the first month of rate cuts and look to two parts of my finances – savings and loans.

1. Get Fixed Interest Rates on Savings

If you have short term savings, needed in the next 12 months, you will want to find a certificate of deposit or other safe short-term investment that guarantees a rate of return. If the banks expect rates to fall in September, you’ll start seeing them drift lower in late August and early September (since the meeting is the 18th).

The rates won’t go crashing down so it’s not a huge deal if you miss this immediately.

But you’d rather get the interest than not and for short term savings, you won’t see higher rates so you might as well lock something in now.

If you have longer term needs for cash, you’ll want to get them into the stock market because the stock market loves falling rates. Falling rates means companies have cheaper access to capital and are able to grow faster.

2. Prepare to Refinance Loans

For loans, keep an eye on your rate versus what the prevailing rates are. You won’t see a huge move initially because 0.25% drops will not result in significant enough savings for most loans (to overcome the fees of refinancing).

I would take this time to improve your credit score.

This means checking your reports for errors and making sure you don’t make any credit score mistakes (like opening new credit cards or missing payments), so that your score is pristine when you need it for a refinance.

Once the rates start coming down, experts suggest you start looking at refinancing options when you can get a rate that’s 1%+ lower than your existing one. Depending on the speed of the cuts, you may wait until the rate is even lower sometimes.

If you intend to tap into your home equity now, do so with a home equity line of credit (HELOC) rather than a home equity loan. HELOCs usually have a variable rate so it’ll drift down as rates go down. A home equity loans are typically fixed rates.

3. Revisit Your Investments

I’m going to write some explanations below but the summary is this – your investment strategy should be based on you and your timeline. It has nothing to do with interest rates. If you’re 40 years from retirement, save early and often. If you’re 10 years from retirement, you need to start planning your withdrawal strategy.

That said, it is useful to understand how interest rates impact your investments.

As I mentioned earlier, the stock market loves when interest rates go down. Part of it is that businesses can borrow more cheaply but also because funds exit the bond market to go into the stock market.

Your intuition may tell you that if the stock market loves it when rates go down, bonds must hate it right?

Kind of.

Existing bonds love it when interest rates go down. If you could get a 5% yield from Treasury note, bonds must pay way more to entice savers to lend them money. When the safe rate of return goes down, bonds with higher rates are more valuable and so their value goes up.

But new bonds will offer a lower yield because the safe rate of return has gone down. If you can only get a 3% yield on a Treasury note, a bond doesn’t have to pay as much as when you could’ve gotten 5% from a Treasury note.

Newer bonds are less appealing in a lower interest rate environment, which is why investors move to the stock market.

Rates Will Come Down

As of July 2024, the Federal Reserve has set the target rate of 5.25-5.50% but has indicated it’s coming down. We know that they will come down, probably this year, but aren’t sure yet.

You can start preparing now for that eventuality and be ready when it happens.

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About Jim Wang

Jim Wang is a forty-something father of four who is a frequent contributor to Forbes and Vanguard’s Blog. He has also been fortunate to have appeared in the New York Times, Baltimore Sun, Entrepreneur, and Marketplace Money.

Jim has a B.S. in Computer Science and Economics from Carnegie Mellon University, an M.S. in Information Technology – Software Engineering from Carnegie Mellon University, as well as a Masters in Business Administration from Johns Hopkins University. His approach to personal finance is that of an engineer, breaking down complex subjects into bite-sized easily understood concepts that you can use in your daily life.

One of his favorite tools (here’s my treasure chest of tools, everything I use) is Empower Personal Dashboard, which enables him to manage his finances in just 15-minutes each month. They also offer financial planning, such as a Retirement Planning Tool that can tell you if you’re on track to retire when you want. It’s free.

>> Read more articles by Jim

Opinions expressed here are the author’s alone, not those of any bank or financial institution. This content has not been reviewed, approved or otherwise endorsed by any of these entities.

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